UK rate rise a “modest boost for pensions”

October, 2017 Print

The Bank of England’s decision to raise the base rate by 25 basis points has been called a modest boost for pension funds by Steve Webb, director of policy at Royal London and former pension minister.

Webb commented after the first UK rate rise in a decade: “If today marks a turning point in interest rates this should signal a gradual recovery in annuity rates and could help to reduce deficits in company pension schemes.” But he added that if the Bank of England sticks to its plan for “gradual and limited” increases, the pension landscape is unlikely to be transformed as rates remain at historically low levels.

Other experts believe that the Bank of England’s move could be a one-off, rather than the first in a series of rate rises. Hermes Investment Management group chief economist, Neil Williams, said the rise reversed the post-EU referendum rate cut and gives some scope for a rate cut if the economy starts to slow. Williams added: “In the absence of a recovery in real wages – which have been squeezed for a decade – I doubt they will hike aggressively.” Williams added that the Bank of England has another lever to pull in winding down quantitative easing policies, by reducing purchases before selling back bonds.

Fathom Consulting said the decision shows that the monetary policy committee believes in the Phillips Curve (the relationship between inflation and spare capacity). But Fathom Consulting’s Joanna Davies said it disagreed with the Bank over growth prospects, saying the UK is likely to enter recession early next year. “We view today’s move as nothing other than a reversal of the unnecessary, and quite probably ineffective, post-Brexit rate cut,” Davies said.

In a comment on the global outlook over the next few years, Fathom’s Davies said that current equity valuations look extremely high, given the historical relationship between long-term real rates of interest and sustainable growth rates. In this case, Davies said equities could be over-valued by up to 40%.

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